BI's bank supervision role may be cut

JAKARTA (JP): The government and the House of Representatives special team on the amendment of the central bank law have agreed to axe the banking supervision function of Bank Indonesia much sooner than the initial plan at the end of 2002.

The banking supervision role will be handled by a new independent agency which would also supervise other non-bank financial institutions, including, insurance companies and pension funds.

The government will propose to the House a new law that would become a legal basis for the establishment of the new agency.

"It has been agreed that the new law (on the establishment of the new agency) will be completed at the latest by the end of 2001," Bank Indonesia deputy governor Achjar Iljas told reporters following a closed doors meeting with the government and the House special team late last week.

But Achjar said that there was no discussion yet on the details of the new agency that would take over the bank's supervision role.

Under the existing Bank Indonesia Law No. 23/1999, the banking supervision function would be separated from the central bank by the end of next year.

The government has proposed a bill that would amend the existing central bank law. The House is expected to complete the deliberation of the bill at the latest in the middle of February.

Bank Indonesia became an independent central bank in May 1999 following the approval of Law No. 23, but it has yet to release its banking supervision function even though the main objective of an independent central bank is normally to maintain the stability of the rupiah.

The government has argued that retaining the banking supervision role of Bank Indonesia would create conflicts of interest between the central bank's monetary management responsibilities and its monitoring and supervision of the payment flow system.

The government and the House will have to revise the existing banking Law No. 10/1998, which stipulates that banking supervision is handled by Bank Indonesia.

But it is still a big question mark whether the government and the House can work fast to meet the new target.

A source at Bank Indonesia had even doubted whether the initial end of 2002 target could be met because both the government and the central bank had not been able to even start discussions about the plan last year as most of their energy and time had been devoted to settling the controversial Bank Indonesia liquidity support facility.

There has also been a question mark over where the staff of the new independent agency would come from.

There is a plan to recruit most of the staff from Bank Indonesia, but there has also been a suggestion that the new agency should be run by a completely separate group of people to help avoid the banking sector from plunging into yet another crisis.

The banking crisis that started in the middle of 1997 has been partly attributed to the weak banking supervision of Bank Indonesia. Many also believe that the central bank was part of the corrupt system during the 32 years rule of former authoritarian president Soeharto.

Achjar warned that the transfer of the banking supervision role from Bank Indonesia to the new agency should be carefully implemented so as not to create new problems to local banks currently trying to survive the crisis.

"What is important is that the transfer process must not create new problems because the banking sector is currently in a recovery process. We don't want to see things that have run properly so far become worse," he said, without elaborating.

Achjar also expected the new agency to be able to work closely with the central bank.

"The mechanism should be stipulated in the law so that it can be properly coordinated. There's a strong relation between monetary policy and micro policy in banking supervision," he said.

The banking sector has two main agendas this year. It must have a minimum capital adequacy ratio of 8 percent and a non- performing loan level of below five percent.

Banks which fail to meet the target could be either closed down or merged with stronger banks.

There are currently some 150 commercial banks after the government shut down around 66 banks following the 1997 banking crisis.

The government is preparing plans to continue consolidating the currently over-crowded banking industry with the aim that by 2005 there would only be around 15 "core banks" and around 20 "focus banks."

The government is also planning to launch an insurance deposit scheme that would replace the costly blanket guarantee scheme launched in 1998.

The government initially planned to replace the blanket guarantee program in 2004, but there has been growing pressure to change it sooner. (rei)